When analyzing a company's financial health or looking to take ownership of it, estimating the company's value is a crucial process. Unfortunately, an entire business cannot be valued as easily as a smaller, more liquid asset like a share of stock. However, there are several ways to calculate the market value of a company with relative accuracy. These methods involve considering the company's stock value, analyzing recent comparable sales, and analyzing the company's balance sheet.

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Steps

Calculating the Market Value of a Company

1

Calculate the company's market capitalization to estimate its value. The most reliable and straightforward way to determine a company's market value is to calculate what is called its market capitalization - the total value of all shares outstanding. Note that this method only works for publicly traded companies, where share values can be easily determined.

Begin by determining the number of shares outstanding. Multiply this number by the current stock price to determine the market capitalization. This figure represents the total value of all investors' stakes in the company, giving a fairly accurate picture of the company's overall value.

For example, consider Anderson Enterprises, a publicly traded telecommunications company with 100,000 shares outstanding. If each share is currently trading at $13, the company's market capitalization is (100,000 * 13) or $1,300,000.

To look up the number of shares outstanding and the current price per share, you can use financial analysis websites like Google Finance and Yahoo Finance.

A disadvantage of this method is that it subjects the company's value to the fluctuations of the market. If the stock market declines due to an external factor, the company's market capitalization will fall even if its financial health has not changed.

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2

Analyze recent business sales and mergers to estimate the company's value. This valuation method works well if a company is privately held or if the market capitalization figure is deemed unrealistic for any reason. To estimate a company's value, look at the sales prices for comparable businesses.

There is some discretion involved in choosing which businesses are comparable. Ideally, the companies considered should be in the same industry and be roughly the same size as the company you want to value. In addition, the sales should be recent so that they reflect more or less up-to-date market conditions.

After finding recent sales of comparable businesses, average together all the sale prices. This average value can be used as an estimate of the market value of the company in question.

For example, imagine that 3 recent mid-sized telecommunications companies sold for $900,000, $1,100,000, and $750,000. Averaging these 3 sale prices together yields $916,000. This might seem to indicate that Anderson Enterprises' market capitalization of $1,300,000 is an overly optimistic estimate of its value.

This method has several shortcomings. First, it may be difficult to find enough data, as comparable business sales may be very infrequent. Also, this valuation method does not account for significant differences between business sales, such as whether the company was sold under duress.

3

Compile the company's estimated value from the assets it holds. In certain cases, a company's value can be reasonably ascertained from its balance sheet alone. This method is most useful when evaluating holding companies and investment firms, where the total value of the company's investments can be used as a measure of the value of the company itself.

Imagine that Anderson Enterprises has a balance sheet showing net assets of $1,100,000. If these assets are primarily investments in other companies, then this figure is a reasonable estimate of Anderson Enterprises' worth.

4

Value the business using the "multiplier" method. The most appropriate method for valuing small businesses is the multiplier method. This method uses an income figure, such as gross sales, gross sales and inventory, or net profit, and multiplies it by an appropriate coefficient to arrive at a value for the business.

The coefficient used will vary based on the industry, the market conditions, and any special concerns within the business. This number is somewhat arbitrary in nature, but a good figure to use can be obtained from your trade association or from a business appraiser.

For example, imagine that the appropriate multiplier for mid-sized telecommunications companies is estimated at 0.8 * net profit. If Anderson Enterprises' net profit this year is $1,400,000, then the multiplier method yields a business value of (0.8 * 1,400,000) or $1,120,000.

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The reason for your evaluation should influence the weight which you afford the company's market value. If you are considering investing in a company, your primary concern should be the company's growth rate, not its total value or size.

Sometimes the term "enterprise value" is used to describe the price of buying a business outright. This figure will generally be higher than the firm's market value as determined above.